Question 1

According to the quantity theory of money,if the economy were facing inflation,the Fed could combat it by:

Accepted Answer

A) decreasing the supply of money. 
B) increasing the supply of money. 
C) cutting taxes. 
D) increasing taxes. 
A) decreasing the supply of money. 
B) increasing the supply of money. 
C) cutting taxes. 
D) increasing taxes.

Question 2

Suppose the nominal interest rate is 7 percent annually,and you deposit $1,000.Inflation in the economy throughout the year is 7 percent.At the end of the year,you have earned:

Accepted Answer

A) an increase in your purchasing power. 
B) no increase in your purchasing power. 
C) no increase in your savings. 
D) a decrease in your purchasing power. 
A) an increase in your purchasing power. 
B) no increase in your purchasing power. 
C) no increase in your savings. 
D) a decrease in your purchasing power.

Question 3

Unpredictable inflation can cause businesses:

Accepted Answer

A) to have a hard time planning future production. 
B) to cease production until they know how to adjust for inflation. 
C) to restrict output and stockpile inventory. 
D) None of these statements is true. 
A) to have a hard time planning future production. 
B) to cease production until they know how to adjust for inflation. 
C) to restrict output and stockpile inventory. 
D) None of these statements is true.

Question 4

In order to calculate the real interest rate,simply:

Accepted Answer

A) add the rate of inflation to the nominal interest rate. 
B) subtract the rate of inflation from the nominal interest rate. 
C) subtract the nominal interest rate from the rate of inflation. 
D) divide the nominal interest earned by the rate of inflation. 
A) add the rate of inflation to the nominal interest rate. 
B) subtract the rate of inflation from the nominal interest rate. 
C) subtract the nominal interest rate from the rate of inflation. 
D) divide the nominal interest earned by the rate of inflation.

Question 5

The number of transactions a typical dollar is used in during a given period is called the:

Accepted Answer

A) velocity of money. 
B) transaction rate. 
C) quantity theory of money. 
D) transaction velocity. 
A) velocity of money. 
B) transaction rate. 
C) quantity theory of money. 
D) transaction velocity.

Question 6

If an economy produces 2,500 units of output with a money supply of $500 and a velocity of 10,we know the price level must be:

Accepted Answer

A) $1. 
B) $5. 
C) $2. 
D) $10. 
A) $1. 
B) $5. 
C) $2. 
D) $10.

Question 7

High inflation redistributes wealth from:

Accepted Answer

A) those who save to those who borrow. 
B) those who borrow to those who save. 
C) those who borrow to banks. 
D) banks to those who save. 
A) those who save to those who borrow. 
B) those who borrow to those who save. 
C) those who borrow to banks. 
D) banks to those who save.

Question 8

The quantity theory of money states explicitly that:

Accepted Answer

A) the overall quantity of money in existence is determined by the value of money. 
B) the price level is determined by the money supply. 
C) the money supply is determined by the price level. 
D) None of these statements is true. 
A) the overall quantity of money in existence is determined by the value of money. 
B) the price level is determined by the money supply. 
C) the money supply is determined by the price level. 
D) None of these statements is true.

Question 9

Most economists agree that the best rate of inflation for a stable economy would be about:

Accepted Answer

A) zero. 
B) two percent. 
C) five percent. 
D) seven percent. 
A) zero. 
B) two percent. 
C) five percent. 
D) seven percent.

Question 10

If an economy produces 1,000 units of output with a price level of $1 and the money supply (M)is $500,velocity is:

Accepted Answer

A) 2. 
B) 500. 
C) 50. 
D) .5. 
A) 2. 
B) 500. 
C) 50. 
D) .5.

Question 11

The time,money,and effort one has to spend managing cash in the face of inflation is referred to as:

Accepted Answer

A) shoe-leather costs. 
B) menu costs. 
C) tax distortions. 
D) the velocity of inflation. 
A) shoe-leather costs. 
B) menu costs. 
C) tax distortions. 
D) the velocity of inflation.

Question 12

If an economy produces 3,000 units of output with a money supply of $500 and a velocity of 9,we know the price level must be:

Accepted Answer

A) $1.50. 
B) $2. 
C) $4.50. 
D) $9. 
A) $1.50. 
B) $2. 
C) $4.50. 
D) $9.

Question 13

If the average price level increases 10 percent per year,and the velocity of money is 2,then:

Accepted Answer

A) the inflation rate is 10 percent. 
B) the inflation rate is 5 percent. 
C) the inflation rate is 2 percent. 
D) the velocity of money will increase. 
A) the inflation rate is 10 percent. 
B) the inflation rate is 5 percent. 
C) the inflation rate is 2 percent. 
D) the velocity of money will increase.

Question 14

Suppose the nominal interest rate is 4 percent annually,and you deposit $1,000.Inflation in the economy throughout the year is 5 percent.At the end of the year,you have earned:

Accepted Answer

A) a real rate of return of 1 percent. 
B) an increase in your purchasing power. 
C) a nominal increase in your savings of $40. 
D) All of these statements are true. 
A) a real rate of return of 1 percent. 
B) an increase in your purchasing power. 
C) a nominal increase in your savings of $40. 
D) All of these statements are true.

Question 15

The neutrality of money is the idea that:

Accepted Answer

A) aggregate price levels do not affect real outcomes in the economy. 
B) hard money has a neutral effect in the economy. 
C) in real terms,it makes no difference who is spending each dollar. 
D) virtual money has a neutral effect in the economy. 
A) aggregate price levels do not affect real outcomes in the economy. 
B) hard money has a neutral effect in the economy. 
C) in real terms,it makes no difference who is spending each dollar. 
D) virtual money has a neutral effect in the economy.

Question 16

Inflation rates over the last 40 years have:

Accepted Answer

A) generally decreased around the world. 
B) generally increased around the world. 
C) generally increased for developing nations and decreased for developed nations. 
D) generally decreased for developing nations and increased for developed nations. 
A) generally decreased around the world. 
B) generally increased around the world. 
C) generally increased for developing nations and decreased for developed nations. 
D) generally decreased for developing nations and increased for developed nations.

Question 17

Deflation:

Accepted Answer

A) is a sustained fall in the aggregate price level. 
B) is negative inflation. 
C) is much less common than inflation. 
D) All of these statements are true. 
A) is a sustained fall in the aggregate price level. 
B) is negative inflation. 
C) is much less common than inflation. 
D) All of these statements are true.

Question 18

When an economy's actual output is greater than its potential at some point in time,we say that it is experiencing:

Accepted Answer

A) a positive output gap. 
B) a negative output gap. 
C) inflation. 
D) deflation. 
A) a positive output gap. 
B) a negative output gap. 
C) inflation. 
D) deflation.

Question 19

If the real rate of return is 0 percent,and the inflation rate is 3 percent,then the nominal interest rate must be:

Accepted Answer

A) 0 percent. 
B) 3 percent. 
C) -3 percent. 
D) 6 percent. 
A) 0 percent. 
B) 3 percent. 
C) -3 percent. 
D) 6 percent.

Question 20

When an economy experiences deflation,investment will:

Accepted Answer

A) decrease,because businesses will not take out loans that will increase in value over time. 
B) increase,because businesses will take out loans that will increase in value. 
C) decrease,because businesses will spend cash instead of borrowing it. 
D) increase,because businesses will spend cash instead of borrowing it. 
A) decrease,because businesses will not take out loans that will increase in value over time. 
B) increase,because businesses will take out loans that will increase in value. 
C) decrease,because businesses will spend cash instead of borrowing it. 
D) increase,because businesses will spend cash instead of borrowing it.

Exam 32: Inflation

According to the quantity theory of money,if the economy were facing inflation,the Fed could combat it by:

Suppose the nominal interest rate is 7 percent annually,and you deposit $1,000.Inflation in the economy throughout the year is 7 percent.At the end of the year,you have earned:

Unpredictable inflation can cause businesses:

In order to calculate the real interest rate,simply:

The number of transactions a typical dollar is used in during a given period is called the:

If an economy produces 2,500 units of output with a money supply of $500 and a velocity of 10,we know the price level must be:

High inflation redistributes wealth from:

The quantity theory of money states explicitly that:

Most economists agree that the best rate of inflation for a stable economy would be about:

If an economy produces 1,000 units of output with a price level of $1 and the money supply (M)is $500,velocity is:

The time,money,and effort one has to spend managing cash in the face of inflation is referred to as:

If an economy produces 3,000 units of output with a money supply of $500 and a velocity of 9,we know the price level must be:

If the average price level increases 10 percent per year,and the velocity of money is 2,then:

Suppose the nominal interest rate is 4 percent annually,and you deposit $1,000.Inflation in the economy throughout the year is 5 percent.At the end of the year,you have earned:

The neutrality of money is the idea that:

Inflation rates over the last 40 years have:

Deflation:

When an economy's actual output is greater than its potential at some point in time,we say that it is experiencing:

If the real rate of return is 0 percent,and the inflation rate is 3 percent,then the nominal interest rate must be:

When an economy experiences deflation,investment will:

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